Reviewing monetary policy inertia and its effects: The fractional integration approach for an emerging economy

Abstract

This paper addressed the monetary policy inertia of a relevant emerging economy based on the fractional integration approach (Geweke and Porter-Hudak, 1983; Baillie et al. 1996), so that we avoided the potential spurious estimates for such an inertia that can be caused by adopting conventional unit root tests, which were usually applied to the related literature. We thus confirmed the hypothesis of a high monetary policy inertia (Clarida et al., 1999), even after controlling for long memory in time series. Furthermore, we identified a positive relationship between inflationary expectations and the inertial component. It means that, under an inflation targeting regime, central banks should adjust both the basic interest rate and its inertial path in order to accomplish the inflation target over time.